TECHNOLOGY

TECHNOLOGY; NEC Unit Admits It Defrauded Schools

By MATT RICHTEL and GARY RIVLIN

Published: May 28, 2004

SAN FRANCISCO, May 27—
Criminal investigations into corruption and waste in the E-Rate program, a federal plan to bring Internet access to poor schools and libraries, yielded their biggest legal settlement to date on Thursday. NEC Business Network Solutions, a subsidiary of NEC, the computer giant, agreed to plead guilty to two federal felony counts, one for wire fraud and one for antitrust violation, and to pay $20.7 million in fines and restitution.

The settlement, announced in federal court in San Francisco, comes amid increasing scrutiny of the multibillion-dollar E-Rate program. Congressional hearings on the program may be held as early as next month, according to Congressional staff members. Lawyers involved in the case said there were likely to be additional, and even larger, settlements with other technology vendors.

''This is just one piece of a nationwide scheme that is all coming to light,'' said Eric R. Havian, a lawyer who is representing the San Francisco Unified School District, which tipped federal prosecutors to the fraud. ''There are many school districts that were victimized.''

Gerald P. Kenney, general counsel of NEC America, said in a statement: ''We made mistakes with E-Rate. We've acknowledged and accepted responsibility for those mistakes, cooperated fully with the government and taken action to ensure that these problems can't happen again.''

Established with great fanfare in 1996, the E-Rate program added a tax to telephone bills, with the proceeds to be distributed mostly to poor and rural schools. The program has been used by school districts to pay for network infrastructure, like routers and switches to direct Internet traffic, computer servers to manage the system and cables to connect them.

The program gave schools the ability to seek competitive bids from vendors. But there is mounting evidence that some companies hired to provide equipment and services persuaded schools to forgo competitive bids, inflated their prices or defrauded administrators of the E-Rate program when presenting the final cost for services.

''Schools are being promised million-dollar systems when a system costing $10,000 would make more sense,'' said John Dunbar of the Center for Public Integrity, a public policy research group in Washington. ''That's one of the flaws of the system. If the schools had vested interest in making sure that the money was being spent wisely, then it wouldn't be so easy to defraud the program.''

The case that includes NEC involved several companies and individuals who were accused of conspiring to defraud the San Francisco Unified School District and several other districts across the country. The case led to criminal charges filed by the United States attorney in San Francisco, and a civil lawsuit filed by the San Francisco district.

According to the civil lawsuit, which was filed in 2001, the scheme was engineered by a company called Video Network Communications. That company, which was working with several computer companies, helped to bribe at least one school district employee to forgo competitive bids for the network infrastructure, according to the lawsuit.

That employee, Desmond McQuoid, was the custodial supervisor of the district. He pleaded guilty to mail fraud last year and was sentenced to 21 months in prison, according to Mr. Havian, the lawyer for the school district. Mr. Havian said the suit against Video Network Communications was still pending.

According to the complaint, several computer companies, including the NEC subsidiary, persuaded the district to purchase more equipment than it needed, charging rates that yielded twice their normal profit margins, according to Mr. Havian.

''They sold the district stuff it didn't need, didn't want or didn't know what to do with,'' Mr. Havian said.

He noted, for example, that NEC persuaded the district to stock individual classrooms with powerful computer servers when the district needed just a handful of servers to manage the entire system.

In addition, Mr. Havian said, NEC then sent a bill to the E-Rate administrators, a quasi-governmental agency called the Universal Services Administrative Company, for tens of millions of dollars more than the actual cost of the equipment.

Mr. Havian said that the scheme affected five school districts in addition to the San Francisco district: two in Michigan and one each in South Carolina, Arkansas and Wisconsin.

Under the settlement, NEC will pay a $4.7 million criminal fine and $16 million, including $5.6 million in equipment and services, to settle the suit brought by the San Francisco schools.

''Congress established the E-Rate program to help educate the underprivileged,'' said Kevin V. Ryan, the United States attorney in San Francisco. ''This criminal attempt to steal funds from the program comes at the expense of children across the country, and is totally unacceptable.''

A person answering the phone at the Universal Services Administrative Company, which is based in Washington, said the company would not have anyone available to comment on the NEC settlement until Tuesday.

The E-Rate program has helped millions of schoolchildren around the country connect to the Internet. Yet increasing charges of fraud are tarnishing an initiative that Mr. Dunbar called ''a righteous program that seemed like it would do a whole lot of good.''

A report released in the fall of 2002 by the inspector general of the Federal Communications Commission found that the E-Rate program was ''subject to unacceptably high risk of malfeasance through noncompliance and program weakness.'' The inspector general complained at the time of not having enough employees to monitor the program.

''This program has had serious problems from almost the start because of a lack of oversight,'' Mr. Dunbar said. ''Companies would approach these poor schools and talk them into paying for computers and technology that was way beyond anything they actually needed.''

While school districts ''may end up getting stuck with a system they don't need, or a system they can't maintain,'' Mr. Dunbar said, ''the ones paying for it are you, me and everyone who pays a phone bill.''

A spokesman for the House Energy and Commerce Committee said that staff members had been looking into irregularities in the E-Rate program since early last year. Hearings by the Oversight and Investigations Subcommittee of the House Energy and Commerce Committee could start in June.

Smaller companies have been involved in a handful of other legal settlements of allegations of abuse of the E-Rate program, and 40 criminal investigations are continuing, Mr. Havian said. The NEC settlement is the largest fine to date.

Late last year, the former director of information technology for the Harrisburg School District in Pennsylvania pleaded guilty to charges of fraud in connection with the E-Rate program, according to a report in The Patriot-News in Harrisburg. As part of his plea agreement, the newspaper reported, the official agreed to forfeit ownership of three vehicles, a new boat and seven properties.